Why investing your money in a mix of assets is a good idea

When you invest, it makes sense to put your money into different asset classes. This practice is called portfolio diversification. Read the article to learn more about diversification.

Published on 13 November 2025

4 min read

Diversification is key to investment success. A diversified portfolio spreads your investment risk, opens opportunities and aims to deliver smoother returns in the long run.

A diversified portfolio can take many shapes. For example, you can choose to invest across different asset classes, sectors, or geographies. One way to do this is by investing in a mutual fund, which pools money from multiple investors to invest in a diversified portfolio of securities. The investments in a mutual fund are categorised by:

Asset class: E.g. Equity, fixed income, cash, or commodities.

Instrument: E.g. Liquid funds or long-duration bonds for fixed income; large, mid, and small cap stocks for equity.

Sector: E.g. Technology, healthcare, finance, energy.

Geography: E.g. India, Asia, emerging markets, global.

How diversification works: A simple example

Let’s say you are building a ₹1,000 portfolio. A diversified allocation might look like this:

₹600 in equities (spread across large, mid, and small caps)
₹200 in fixed income (like bonds or debt funds)
₹100 in cash
₹100 in commodities (such as gold)

(This is for illustrative purposes only and not recommendatory)

Diversification helps with positive investment outcomes as assets tend to perform differently in any given set of circumstances. Stocks and bonds, for instance, typically move in opposite directions: if the yield on bonds improves, the price of stocks or equities tends to drop, and vice versa. That’s because each asset class has its own unique risk and returns profile.

Total returns per calendar year in %

Year	Domestic Equities	International Equities	Debt	Gold
2014	40	13.7	16.4	-7.9
2015	0.6	4	8	-6.6
2016	5.3	12.4	14.5	11.3
2017	37.6	12.3	2	5.1
2018	-2.1	2.6	6.6	7.9
2019	9	31.8	10.5	23.8
2020	18.3	19	11.9	28
2021	31.8	29.1	2.7	-4.2
2022	4.4	-10.3	1.9	13.9
2023	27.6	25	8	15.4
2024	16.5	26.9	10	20.6

1. Year refers to calendar year
2. Domestic Equities are represented by NSE 500
3. International Equities represented by S&P 500
4. Debt is a composite of government securities

Highlighted years represent highest returns for different asset classes during the calendar year.

Source: Collated from Bloomberg

Benefits of diversification include:

Better managed risk: By spreading your investments across different assets and sectors, you minimise the impact of a specific investment not working out.

Exposure to different opportunities: Diversification allows you to take advantage of different trends and opportunities across asset classes and investments.

Aims for stable returns: Diversification can help reduce portfolio volatility, which may lead to more consistent performance over time.

Three common diversification errors and how to avoid them

1. Investing in multiple companies within the same sector is not actually diversifying. When one sector, such as technology, is performing well, it can be tempting to invest in a number of companies in that sector in the hope it will maximise returns. This is a common error that overlooks sector-specific risks. If that sector experiences difficulties, the entire portfolio might be negatively affected.

2. A second mistake is believing your money is only safe with big companies, for example, by investing in a large-cap mutual fund. Focusing solely on large-cap stocks might limit the growth opportunities of your portfolio. Conversely, over-allocating to small- and mid-cap stocks can increase risk and volatility. Striking the right balance across market caps and asset classes is essential.

3. A third error is to believe that owning multiple mutual funds is itself a guarantee of diversification. It’s what’s inside those funds that counts. Owning fewer funds, selected for their differing investment strategies, can offer diversification.

4. Rebalance as necessary

Putting together a diversified portfolio is just a starting point. As the market shifts, the portfolio's asset allocation may drift, increasing overall risk beyond your intended tolerance and potentially hindering long-term financial goals. To stay on track, it's helpful to monitor and adjust portfolio regularly.

Bottom line: Diversification helps manage risk

Diversifying investments across various asset classes, sectors, and geographies remains a prudent strategy for managing risk and achieving long-term financial growth. While diversification does not eliminate risk entirely, it helps mitigate the impact of market volatility and enhances the potential for more stable returns over time.

The process of building and maintaining a diversified portfolio is complex, and it is important to know that you do not have to do this all on your own. A SEBI Registered Investment Adviser (RIA) can assist in constructing a portfolio aligned with your risk tolerance, financial objectives, and investment horizon, ensuring that your strategy remains both effective and manageable. Seeking professional guidance can provide clarity, confidence, and peace of mind as you work towards your financial goals.

Disclaimer: This article is for educational purposes only.